Transferring value from and in to China

China is a complex country. This is crucial to see. Let me point out few challanges:

1) Not every province is under 100% control (XinJiang, Tibet, Hong Kong, Inner Mongolia)

2) Many governments act independently - what surprised naked eye

3) Currency is internationally traded & credit cards in CNY are issued

4) There are counties with special relationship with China (Taiwan, Singapore, Myanmar, North Korea, Macao, Vietnam)

5) There are countries China seeks influence (Africa)

6) Moving value in and out could be avoided with ability of using somebody elses fund while in China and than returning it back

7) China has free trade zones

8) There are many legal tenders not appearing to have value on first sight

NPL China (july 1017)

NPL deals in China are challening. Returns seems to be low, inflow to China challenging and outflow even harder. Offshore business interested to jump in are dealing with a scare factor together with challenges in communication.

Let me see it other way:
A) what all ways u can activate your profit in China in NPL?
B) being able to buy now will allow u to buy in future
C) how many times you can wash the loans?
D) how much does your foreign employee know about China?
E) who will collect for u?
F) why u want to jump out so quickly?

Doing deals in China is more of challenge. More of being there before it happens. Once it happens it is very fast & usually between local people. Unless u were first....

China (Shanghai) - playing rough on foreigners

After a time we will observe two different/three different answers from your chinese advisors:

1. You are Chinese you can
2. You are foreigner you are crazy and can not, as this is not usual
3. You are dark color, please leave my office.

Therefore a local partner is a must. Problem is that Chinese people like to get in touch, discuss & become friends. Therefore a great Taiwaneese may be a solution, as he/she will be opposite to the mentality, but seems like local.

China - challenge & opportunity

Challenging is to find somebody u trust, somebody who is local as it matters, somebody who will share the values of your partners with you. Prepare as many references as u can for the case, so the look on your Chinese partner is not telling you: You stupid foreigner, this is not possible in China :)

China - moving of the cash

Beijing a proper business in China is connected with various challenges. Lets focus on finance, how to move the money inside and outside of the country and what expectation might the government impose:

1. Equity .... after the registration of the company it is essential to register total amount of investment. Most of the SMEs and MMEs rules will apply to 70/30 ratio, where 70% shall be incoming as an equity. Once registered money could be send to China from outside. Please be informed, that sending CNH to China is connected with issues, as government controlled banks are keen to collect foreign currency. Therefore u would need your USDs or EUROs to be transferred and than pau the price of changing them to local currency. Expect to loose up to 5%, if you dont negotiate the rate upfront.

2. Loan .... Intracompany loan, set by registration making 30% of total investment is additional way how to pump in the money. By the loan it is expected to transfer to equity once the company did spend all the equity and still is in loss or in other case to be transferred back to origin aftet the equity prooves to be sufficient and there is no additional cash need on investments or working capital. It is possible to charge interest on such a loan and this interest shall be lower than commercial rate due to intracompany status and still higher than deposit rate in China, currently around 4%. It may be imposed withdrawal tax on such a downpayment in amount of 10%

3. Cash sweep .... a product introduced in various parts of China to help international companies to move money more free in and outside of China. Few rules need to be applied and still it will more freely move the cash.

4. SBLC .... long term financing inside China trough bank financing. This way the daughter company doesnt suffer by sending money back to origin, as they were never send to China at first.

5. Trading .... having a reasonable product or service to be purchased outside of China. This could be limited, as the price needs to be transparent and it might always be unpredictable how the local bank reacts

6. Agency scheme .... very hard to use, as it is unpredictable and usually expensive. Also acxoutingwise very challenging.

Shanghai - reality

Finance in Shanghai became less untouchable for foreigners theese days. Even the market is strictly regulated and the regulation is good to observe the proper partner on a bank side could make a difference.

Another way how to see the same issue is to follow the main issue foteigners have : How to tak with China, so China can answer the way for foreigner to understand. And who to meet, that will be in China long enough to be sure he can support you and the question u give him is not something new, but something he found the answer already. It is not good to stick outside the main flow. But it also doesnt mean, that there are not other flows to follow. Just do not lead the flow in the beginning.

China - Islamic banking

There are three principles islamic banking stands on:
1. Do not charge interest, but share profit or loss
2. Do not finance anything that is not in accordance with the islamic belief. F.e. pork, speculation....
3. Do not finance anything that is later financed non-sharia way

This points are important to understand also in accordance with collection of the financing, sharing of the dissolving company value, mortgage financing or sale of the banks ownership or even responsibility of the bank for a good results and own capital amount.

Lets take it one by one:
*interest*
You are not allowed to charge interest, but u may charge drawdown fee & once in time loan management fee

*profit/loss sharing*
You can decide the percentage to share the loss or the profit. It shall be the same for both cases

*dissolving value*
once company is dissolved and there is any loss outgoing from the dissolution you share the loss in accordance with the profit/loss sharing percentage

*mortgage financing*
Bank owns the property and than sells it partially to purchasing party. Therefore property with building value of 100 is sold to new owner f.e. for 150 with f.e. 20/80 ration in begging. Therefore new owner needs to pay 30 (20% of 150) as a downpayment to start the deal. And than for every new payment, f.e. 15 the bank transfers 10% of property to new owner.

*sale of banks ownership*
As the bank is the owner of the property, not the owner of the collateral, it sells the % it owns in the property. Therefore direct relationship is established.

*Own capital*
The sharia loan is accounted as an own capital of the company

China - payment problems

What could be the probable way of seeing problems in financial system in China?

People are using more and more 3rd party, out of bank, payment systems. Banks are running out of liquidity and therefore increase the pressure on the government to stop 3rd party payment systems. As the only real number on the banks balance sheet is the amount of the cash any bank in any given time has on its accounts.

System would prepare for financial meltdown from inside.

CZECHOSLOVAK SUCCESS IN CHINA

"Little mole" is a cartoon invented & produced in Czechoslovakia many years ago. The main author, Mr. Zdenek Miller did already pass away and his daughter is now taking care of his product. It is really nice to see the same character, little mole, to be presented to Chinese children these years. Mole is accompanied by panda to match Czechoslovak and European culture with Chinese one.

The picture is from Beijing airport where u can buy any plush toy representing a character in China national TV.

Hong Kong - No.1 financial capital of the world 2012 prediction

Looking on the "South China morning post" news from 2012 I feel I had been liberally misinformed. This was a joke in 2012 with some weird feeling China will do what is proclaimed. And now it is a reason to cry, as HK became tourist center of China, as Venice is in Europe or as Las Vegas in US.

HK did loose a lot and keeps loosing despite proclamation in 2012.

China - small company - problems

Being a foreign owned small company in China has following financial/controlling issues:
- focus on sales not on spending
- try to break even by putting only paid invoices in the budget
- repeating the same financial mistakes over accouting period
- wrong cash flow planning
- short term financial focus
- asking for cash before focusing on return of the cash
- not dealing with RMB fluctuation
- facing an issue with local accountants

China rails - destination Europe

China opens this month a railway from Yiwu to London, or by other words it connects Chinese network to English one. It is a breakthrough as the whole journey takes 2 and half week (boat around 5 weeks). Whole journey is thought Kazakhstan, Russia, Belarus, Poland...

It will be amazing to see the costs both towards England from backwards. Currently being around 5 USD a kilo I would like to see how much will quicker train be. It also changes the trade landscape, as trade will follow Silk road instead of traditional road by boat. Economies like Singapore, Shenzhen, Shanghai, Egypt may suffer as a considerable amount of budget depends on it. And it also affects banking and finance, as there will be different flow of capital following the new routes.

Difference by two and half weeks would decrease a cash flow need for companies and bring better response-rate to product-quality-development costs ratio. Following my calculation if the transportation of goods costs makes around 10% of the price of the goods from China (example from toy industry by boat) than a quicker way may be allowing the purchase managers to pay more for new mean of transportation (ceteris paribus). Expected increase may be in the range of %s though.

It might bring the issue with taxes and dues paid and being return (GST China issue). Also it might be interesting to see what will happen on borders in Poland, as the tax office there could have different approach to goods than Hamburg has (or UK port). There is also almost no big forwarder focusing on a trains from China with almost no infrastructure around the track.

Equity & Loand from foreign mother company in China

To send money for your company in China on a registered bank account it is needed to have a permission. If your investment is smaller than 2 MM USD you would probably be pushed for 30/70 ratio, where 70% is a loan and 30% has to be in form of equity.

What does it mean in reality I

In reality it means that every 70 from your 100 has to be frozen in China for very long, will a big probability till u will stay in China with your company. This money is frozen and even they will earn money, you will need to pay
a) income tax
b) dividend tax
c) extra fee for a SAFE to get allowance to withdraw the money from China
d) be audited

This everything can pile to 50%. And it is even harder, as you will many times get an offer to rent an office without tax for 10, with tax for 12 plus a rolling eyes and push by local people why u want to pay tax. So in the end u decide to pay 10 but without invoice. I would need to look deeper in the issue, as it seems that supplier is just moving his/hers tax burden from him/her to you. That would be ok and it will avoid your problems with tax office, accounting and monitoring of costs. On the other side it creates additional problem with cash flow and logically the local management will push you to accept no invoice costs.

What does it mean in reality II

It means that on 70% of the money you will need to grow your business in China u will need to pay 50% additional tax, so u will need to earn 105 just to get your 70 and be on black zero.

This means that China is pushing for:
a) low inflow of foreign money to China, as it will be cheaper to finance your company from Chinese money
b) harder life for foreigners as it hopes the money can stay in China even it will no be properly taxed
c) investments in low development costs project. projects with big R&D costs need investments in years to get it's returns and than they will be highly taxed.

On the rest 30%, provided as a loan you will need to get permission by SAFE too to withdraw them. SAFE will follow up and give you the guidelines when u can withdraw and how. For sure they would like to see following:
1. if you received the loan before u have to invest it. and only if investment is successful u can pay money back. In other words u would need to pay income tax and withdrawal tax for this 30%. Costs for this might also reach 40% and it shall be easier to get money back. I am afraid that in the end there is no big difference between a loan obtained from another country or equity. Only that loan may with withdrawn quickly and little cheaper.

This makes enterprising in China harder for foreigners. Also it gives additional advantage to local people and therefore decrease the pressure of effectivity.

What can China do not to collapse in 2017

Following the development on Chinese market it is possible we will see bigger pressure on a local economy to restructure, to cut off non-performing state companies or expensive production costs.

Possible scenarios:
a) depreciation of RMB to new values and using the advantage of it for the gathering of additional foreign currency and not allowing local companies to hold foreign currency

b) increase of the interest rate on the market with a motto: We want people to safe more, borrow less

c) continue monetary easing, what comes to point a)

d) open the regulation on job market and decrease the rights of the employees - as they are pretty high now

e) introduce a new tax code to tackle black money - extremely up to Indian solution

f) purchase the debt from the big banks - additional monetary easing (partly happening in 2016)

g) increase the minimal reserves on banks and thus to decrease lending

h) invest in new projects like railways and long connecting roads, like ChengDu - Silkroad or ChengDu Myanmar to get to Indian ocean

i) restrict more the outflow of the cash from China

j) IPO government owned companies and than partially buy bad debts

k) introduce new banknote - 1000 RMB

m) decrease amount of foreigners in the country

n) others

Success in China

Following principles:
1. China is a develop country. Therefore sentences like: "China is different, it did not reach that development point" .... are just a game. An average worker in China is earning the same or more than in Europe. It might be up to 1000 EUR (6000 RMB).

2. Dont jump before u know how to jump out. Jump in slowly and after first jump in try to get jump out quickly. Many time what was promised work different and more expensive.

3. Money is not the key. Doesnt mean you invest 1000 u will get better service than by investment of 100. Understand and fight. Chinese like it and respect it.

4. Apologize even you right. Keep friend and dont loose him. Better to know one, than start 100% rely on second one.

5. Business is life, but life is not business. Be ok to say no, be ok the other party to loose and be nice.

6. Chinese try to keep as much foreign currency as they can.

7. Chinese want second nationality. It is for a case of different money they dont want to show.

8. National companies loose money, dont pay debt and do what they feel is politically correct. Therefore do not jump in cooperation directly with them as foreigner. They will always have a way to tell you sorry....

9. Understand basic misunderstandings (colours, habits, life expectations).

10. Talk a lot. Have a Skype every time u can.

China - a consumer finance challenge

Giving a small loan to Chinese people in 2nd tier cities may be understood as a challenge. Han people used to be closed behind a wall protecting them from very militant Mongolian hords, as they were a problem since 10th century (we can see their movement up to Europe by current Hungary and Finland). This thread was coming from North and West (today parts of Russia, Inner Mongolia in China, Mongolia, Kazakhstan, Tajikistan...). On the east they were meeting Japanese people, that overtake Chinese alphabet and culture. On South East they were facing a sea and sea pirates (today Phillipines). On South a strong nation of India did influence China in religion, but until this years there is not a good relationship between China and India (prove of that is the coalition between Pakistan and China, enemy of my enemy is my friend principle). On south they also met nations of Vietnam, Myanmar and Laos. They did strongly influence this culture and use it as depending states. Only difference was Thailand, as their independence was kept for long time even by paying a big tributes.

In long Han history we can see the discovery of money and banking system. Export of certain products through Silk road. But normal people were closed and even in last centuries rules by foreign power.

Last years (since 2004) we can see the first time an average person being able purchase products he doesn't necesarry needs and enjoy his life. Social stability allows people to forget about everyday saving up to maximum. Even Chinese people are very careful about their money, new generation would like to enjoy them. And this is maybe a first time in their history.

Therefore any consumer finance is facing two challenges:
a) big demand, as having a loan is not considered as something bad anymore
b) growing NPL, as the culture of the loan a payback is still not introduced and understood (especially by credit cards, where loan appears to be never paid back).

China - one union, many states

Investing in China is a challenge. Once u decide that market may be good, u find people and resources, your main question will be: "How will I get my resources back, once the business will be profitable?". In this respect is China not the best country to give you one shot, simple and reasonable answer.

As my former boss said: "Find out how will get out of business before u get in to the business". And he was right, especially in China.

There are following main points you can observe in there:
a)China likes the money get in, but once it is approved.

b) China doesn't allow you to invest inside China in form of 100% loan by mother company. Simply said, money can not flow to China as a loan from mother company only, it needs to be at least 66% of equity. And equity means your money is stacked. This money could not be withdrawn easily, like loan may be.

c) even u achieve to send your money to China as a loan it is not automatically allowed to withdraw your money out of China, once u decide to pay back the loan. There is a public organisation called SAFE to get permit from. And this is tricky.

d) do not expect all of your costs to be accounted in operation and therefore decreasing your tax substance. This is additional type of taxing on your sales.

e) be carefull on the rate you might get once money send to China and send outside china

f) focus on income tax, dividend tax and cash withdrawal tax. It can come to 50%.

g) build a second option/second way. Do not show off and keep safe and simple

It might be a great business to invest in China. Merge with others and ask questions.

China - short term operating business challenges

Being incorporated in China may incur few challenges. Let me focus on financial ones or ones related to controlling.

Invoice issue
You may hear from your related supplier the sentence: With invoice for 100 or without for 70. It makes all accounts messy. Very messy I can tell u.

China is different - also for accounting
Do not be messed by this sentence. It is not true. Just ask for a good old accounting journal and spend your time. You may need google translate, but u can crack it. Ok, ok! They use accounts 1XX for the bank,  2XX for A/Rs and A/Ps. 3XX is for equity. But no big surprises. Only that one type of accounts is for costs and sales....5XX.

Nothing to be worried about. Keep asking your accountant. As long as the credit and debit side SUMs correspondent you are ok :)

Tax avoidance
I would describe it as a big one concerning it is social country. It is a big surprise. I sense it might be over optimised. I believe no need.

You stupid foreigner
It is so often to meet accountants with a small experience telling you how something works. And than you start to question them. Good deep in the issue and make them responsible for the words.  Once the voice become quicker, once they remind you that they need to go home be careful. It usually means u will need to spend much more time with them that day.

Lots of luck in China!
It is country worth it.

Business in China - finance

Doing business in China may be different in various segments, size and employees the company has. Lets assume everything else kept constant (we have a company that is already over BEP, relatively good management, growing market) why is our branch in China asking as for another money and why we have a feeling there is not everything very clean.

China is amazing by one thing. It grows and it changes. Before it was growing, but not changing. You can produce a lot, control the quality, be strict on price but friendly. But to succeed in China you needed money. It was like a hole, never ending hole. You could buy/invest/purchase and earn. But you needed money to do so.

Now the time changed. It is more possible to get financing locally. It is not hard to look on shadow financing, FX solutions, over the border conversions. You just need one think. Expect it is possible and ask and ask and ask. Once you hear something is impossible be really careful. Chinese like to say it. And they like to be politely challenged. Do that and miracles will come. Maybe you could be even instead of spending there and earning outside China on China products be able to earn in China and enjoy your money outside of China.

For more detail please contact me :)

How to decrease prices in China

Decreasing of the prices in China is essential. It is a well known secret, that for last years the prices for China purchase increased year by year and if you purchase department is telling you it is so, than as time to change it is here.

Following things is must, you may have other experience, it is my own personal best practice:
1. get phone you can call for cheap - not cell phone, but IP phone for example (usually a few cents a minute to China)
2. get your Skype with video work
3. have an assistant with you, that speaks Chinese. You may need him/her once they will try to tell you they dont speak or understand
4. prepare the price structure in following years + the products you are buying => make a presentation from it, so once you call you have a slide in front of you wit all necessary info
5. understand the different time zone structure + different national holidays structure
6. be prepared to make a notice from every meeting + send them on the email of both you and your Chinese partner
7. Do not to try the approach of I need 10% decrease, so I tell them 20%. It is not good and they will feel you are in not knowing what you want
8. Be hard on your expectation, but be friendly
9. Always ask them to help you and also never ever tell them it is ok for you to finish the cooperation (usually you know each other for very long + you know the quality, once replaced you may be crying of what you got)
10. Be prepared to be annoying. Sometimes even a 6 phone calls will get you what you want.
11. Try to understand what is happening and what problems they have. It is important to care.
12. Thank you all the time the talk to you

We had been suffering from the price increase in last few years a lot. Every 1% you save in purchase is already making a 2,5% sales. You must get it! Do not push sales, if your purchase is bad. Than no profit is created. And also understand, that paying a 5% to your sales is more expensive, than paying a 10% of what was saved to purchase.